You have been asked by your 55 year old uncle Andrew to help him assess a new venture. It is Friday night, and he needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that he will not be able to give you any more information than he already has (and you will be unable to contact him over the weekend), and therefore you may need to rely on your own assumptions and estimates for some of the analysis.
Andrew lives in Atlanta, USA, and was recently made redundant (from a company he joined 25 years ago), leaving the company with a lump sum (tax paid) payment of $750,000. Surprisingly, rather than being depressed by his new state of independence, he is tired of corporate life and excitedly contemplating a new career as a retailer of a range of gourmet chocolates. He is confident that he can set up a business to import chocolates from Belgium and sell them in the USA. His wife, whom he met at business school, is pleased with his passion for this possible new venture, but concerned that it might turn into a financial disaster. She has suggested that he develop a financial plan to evaluate the venture and its viability.
After a couple of hours with Andrew you have assembled the following information from him:
– ChocoBelg SA, an established manufacturer of fine Belgian chocolates, is prepared to give him exclusive rights to sell their products in the US for a five year period in exchange for an upfront payment;
– The chocolates retail in Belgium for an average of Euro 50 per kilogramme, and ChocoBelg is prepared to sell the chocolate to Andrew at a 40% discount to this price;
– ChocoBelg would ship to Andrew on receipt of payment for each order;
– Andrew has found out that air freight from Belgium via air courier would cost on average Euro 7 per kg and that the time from him placing an order to receiving the goods in Atlanta would be three weeks (including the factory time in Belgium);
– Andrew plans to order from Belgium monthly (to maximise the shelf life in the US) and intends to maintain a minimum stock of four weeks worth of sales to ensure that he will be able to supply a suitable range of products to customers;
– He will buy a special refrigerator at a cost of $4,500 to keep the chocolates in good condition,
and has found a small industrial room he can rent nearby at a cost of $350 per month (payable
monthly in advance, plus an initial three month deposit);
– Andrew will sell the chocolate throughout the US by internet only, and is planning to spend
$2,000 with a website designer to develop the site;
– He has already spent $3,500 on a market study that told him that once established, demand
would be about 1,500 kg a month, although in the first year sales would start at only 200 kg in
the first month before building up slowly to the full level at the end of the first year;
– The study also indicated that sales would be dramatically above that average in October (2,500
kg) and January (2,000 kg) due to Thanksgiving and Valentines Day;
– The above study assumed an average selling price of $60 per kg (ignore any impact of sales
taxes in your calculations);
– Packaging and shipping in the US would average $2 per kg, and Andrew is not currently
intending to charge that to the customer;
– All sales would be by credit card, with the credit card company taking 1% per sale and
remitting the monthly total to Andrew one week after the end of each calendar month;
– He believes that one person could run the chocolate operation part-time at a total cost
(including social charges) of $2,650 per month;
– Andrew’s believes that if necessary he could borrow up to an additional $50,000 at 8% p.a.;
– Andrew’s marginal tax rate on investment or earned income is 30%, payable one year in
arrears; he has also told you that he can invest any available cash at an after tax 4% per annum.
Andrew also has a friend, Juanita, who runs a small chain of delicatessens in the Atlanta area.
Juanita is interested in the venture and has agreed that if Andrew would package the chocolates
in boxes decorated with views of Brussels, she would buy one hundred boxes (each containing
550 gm of chocolates) from him per month (which would be in addition to the internet sales
outlined above, and would start immediately), at a price of $28 each. To do this Andrew would
need to buy-in boxes and wrapping paper at a price of $1.25 per box and hire an assistant
specifically to pack and deliver the boxes, at an additional cost of $300 per month.
Andrew remembers discussions on discounted cash flow analysis at business school (although
he admits that he did not fully understand it, unlike his wife who was a distinction student). He
has asked you to prepare an analysis while he is away to help him with the decision, making
clear any assumptions that you make; the analysis should not exceed 4,000 words (excluding the
content of exhibits, headings, etc), or a total of 30 pages (everything included), and should
– A summary of all assumptions and estimates that you have made for your analysis, including
justifications where appropriate;
– A break even analysis;
– A Balance Sheet at start-up (to show the initial capital) and at the end of the first year;
– Monthly cash flow for the first year of operation;
– Annual cash flow thereafter;
– A clear explanation, in plain English, of how much cash the venture will need to get started;
– Any sensitivity analysis that you think would be helpful;
– The most that Andrew could offer ChocoBelg as an upfront fee for the exclusive rights for the
five year period which would leave him no better or worse off than if he did not undertake the
venture, and the amount you suggest he should actually offer them;
– Conclusions and recommendations;
– A critical reflection of the analysis that Andrew has asked you to prepare – what, if anything,
would you do differently in a financial analysis of this opportunity, and why?
Andrew has explained that he is going to be out of town for a wedding so will be unable to provide any assistance at all, but as he pointed out before leaving “you will find this easy with computers and the internet to help”.
The report should demonstrate skills of critical reflection, effective communication and balanced judgement; note that this is not a market report.
Scripts that are excessively long (i.e. exceeding the word limit by more than 10%) will not be read beyond the point of the word limit; there is no minimum word limit.
The overall structure should be as follows:
1. Cover Page (1 page)
2. Table of Contents/List of Exhibits (1 page)
3. Executive Summary
4. Main Report (within the 4,000 word limit as above)
5. Exhibits (if any)
6. List of references.
PLEASE NOTE: The Book Accounting: an Introduction by Eddie McLaney (Author), Dr Peter Atrill (Author) must be referenced as much as possible
The data in the answer should be clearly laid out in tabular format so that the approach and answer are both plainly evident.
Submissions should be machine readable and in MS-Word format only; submit only one file, and include any Excel analysis as images, not embedded files.
Grading will be based on the following breakdown:
– Assumptions, estimates and sensitivity analysis: 20%
– Cash flow and DCF analysis: 25%
– Other financial details (break even, balance sheet, etc): 25%
– Critical reflection: 20%
– Referencing and presentation: 10%
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